Governor: Iowa cities are wrong; failure to act on property tax reform would be a ‘tragic mistake’

Failure for the Legislature to enact an Iowa property tax reform deal that’s being brokered behind closed doors would be a ‘tragic mistake,’ Gov. Terry Branstad said today.

“It would be a tragic disservice to the taxpayers of Iowa to let another year go by without addressing this massive increase in property taxes that will occur without no action,” Branstad said.

Commercial and industrial property owners pay taxes on 100 percent of their assessed values in Iowa, as compared to residential properties that pay taxes on less than half of their assessments. Members of both parties have criticized the inequities, saying it stymies economic development.

One of Branstad’s key arguments for reform is that if nothing is done to alter the current tax formula, property tax revenue will increase statewide by $2.3 billion in the next eight years, an estimate that comes from the state’s revenue and management departments.

In addition to cutting commercial and industrial property taxes, Branstad’s plan would limit future increases in assessed valuation of agriculture and residential property to 2 percent per year, half of the current limit. He contends that cities and counties still will see more than $780 million in property tax revenue growth in the next eight years, even with the 2 percent limit.

But officials from the Iowa League of Cities have previously said that view is flawed because it doesn’t consider individual situations where property values may have sunk in recent years. Plus, the projections do not account for the fact that a county or city sometimes lowers tax rates in response to higher property values.

They also point out that the projected revenue increase amounts to about 4.2 percent annual growth, less than the nearly 4.8 percent average increase in statewide property tax revenue in the past decade.

Criticism of the Republican tax proposal has stalled action so far in this year’s legislative session, including concerns from city officials who say it would shift hundreds of millions of dollars every year onto the back of residential property owners.

Branstad this morning questioned the intentions of local government officials critical of the plan.

“They don’t want anything done. I understand where they’re coming from,” Branstad said. “They see a big cash windfall by not doing anything and they’ve been successful in stopping things from happening year after year after year.”

Alan Kemp, the executive director of the Iowa League of Cities, was not immediately available this morning for comment.

The governor and Senate Democrats have been in discussions on the issue for weeks. While they’ve spoken about tentative agreements, neither said has released a draft report, which officials from the Iowa League of Cities say is critical in them assessing the possible impacts of the proposal.

The governor and Senate Majority Leader Michael Gronstal, D-Council Bluffs, both indicated today that legislation is being drafted. Branstad said the draft could be out as early as today. Gronstal declined to outline a timeline, noting that some areas are still in development stages.

PROPERTY TAX REFORMS

THE PLANS: Legislators from both parties have said the property tax reform compromise they are making behind closed doors will include components of both the House Republican and Senate Democratic plans.

GOP PLAN, House File 2274: Would reduce the value of a commercial or industrial property that is taxed from the current 100 percent to 60 percent over an eight-year period.

Opponents argue such cuts would result in about $602 million in lost annual revenue to local governments, mostly cities and counties, when fully implemented. Advocates say the plan would place commercial property in line with similar rates paid by homeowners.

DEMOCRATIC PLAN, Senate File 522: Would phase in a tax credit that would lower taxes on the first $390,000 of a commercial property’s value. That plan targets greater relief to small businesses. The phasing would be based on the state’s revenue growth.

Critics say it could take years before the Democratic plan was fully in place.

COMPROMISE PLAN: The tentative compromise would cost the state around $250 million a year. It would cut the percentage of assessed value taxed on commercial and industrial properties, albeit far less than the 40 percent that Republicans pushed. It would also contain a component that, like the Democratic plan, would reduce taxes on some portion of a commercial property’s value.